Apple’s forecast to dominate earnings report

Wall Street sees weak iPhone, iPad sales ahead of new products

By

DanGallagher

SAN FRANCISCO (MarketWatch) — Apple Inc. is expected to report a drop in earnings on a small gain in sales when it posts results for its second fiscal quarter Tuesday afternoon. But Wall Street has already moved its focus to the current period.

Reuters

Apple may report a drop in earnings on Tuesday afternoon, but all eyes will be on the forecast for the June period.

Apple’s
AAPL, +1.72%
outlook for the April-June quarter, to be released with the January-March results, come as analysts are modeling another period of weak sales growth.

Still, some worry that even Wall Streets’ lowered estimates remain too high and are setting up the already battered stock to take another beating following the report. Others, meanwhile, see potential for a turnaround.

“Although near-term fundamentals are weak, the stock is close to capitulation, in our view,” UBS analyst Steven Milunovich wrote in a note to clients on Monday.

For the quarter ended in March, analysts expect Apple to report earnings of $9.98 per share on revenue of $42.3 billion, according to a consensus forecast from FactSet. The company earned $12.30 a share on revenue of $39.2 billion for the same period last year.

Apple’s share price has slid more than 42% from its peak in September. The stock was trading up about 1.5% to $404.80 early Tuesday afternoon.

Several factors are weighing down earnings for the company. For one thing, sales of the high-margin iPhone have slowed — analysts are expecting about 36 million iPhones to ship for the March quarter compared to 35 million units in last year’s comparable period.

Also, while sales of the iPad tablet are expected to jump from 11.8 million units last year to more than 18 million units for the recently ended period, a large number of the more recent sales are expected to be the iPad mini which, Apple has admitted, carries a gross margin “significantly below” its corporate average.

In addition, the company is still relatively new to the market with significant re-designs of its product lineup late last year. The iPhone 5, the iPad mini and a new iMac are just a few that got a significant overhaul in the fall, and Apple has said its manufacturing costs are higher in the early part of a product’s lifecycle.

Those factors are expected to play into how Apple sets its guidance for the April-June quarter.

Analysts are predicting earnings of $8.85 per share on revenue of $38.2 billion for the current quarter, according to FactSet. For the same period last year, Apple earned $9.32 per share on revenue of $35 billion. Many seem to expect that Apple will guide the period even lower.

“We believe this is well accepted among investors, but believe with the dynamic of numbers coming down, it is difficult to predict what the stock will do in immediate reaction of the quarter and guide,” Gene Munster of Piper Jaffray wrote on Monday.

Munster said that bigger questions remain about “how Apple can reaccelerate iPhone growth and the level of cannibalization from the cheaper phone” that many believe the company is building for emerging markets.

Gross margins will be another closely watched element in the forecast. Apple has kept its quarterly gross margin line above 40% for 7 of the last 8 quarters, but posted a margin of 39% in the October-December period and forecasted a midpoint of 38% for the January-March quarter.

Some believe another quarter of gross margins below 40% will further damage sentiment around Apple shares, as more investors are worried about the company’s ability to maintain high profitability in a hotly competitive mobile-device market.

“If our estimates for this quarter and guidance are correct, and Apple does not announce that it is returning incremental cash on the call, we suspect Apple’s stock could come under further near-term pressure.” wrote Toni Sacconaghi of Bernstein Research in a report last week. “That said, gross margins and tone will be key.”

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.